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Commentary: The Mercosur Marriage Is In Trouble (Int'l Edition)

January 28, 2001

International -- Latin American Business

Commentary: The Mercosur Marriage Is in Trouble (int'l edition)

It looked like a perfect match. Chile and Mercosur--the customs union formed in 1990 by Argentina, Brazil, Paraguay, and Uruguay--would tie the knot just a few months before the 2001 Summit of the Americas in Quebec City in April. With Chile a full-fledged member of Mercosur, South America's biggest economies would speak with one voice on plans for a Free Trade Area of the Americas (FTAA), a hemisphere-wide trading bloc slated to come into force in 2005.

So it was no surprise that officials in Brazil, Mercosur's biggest economy and its de facto leader, were outraged when Chile announced on the eve of the December nuptials that it was in trade talks with the U.S. and that Mercosur membership was now on the back burner. To add insult to injury, Argentina hinted that it, too, would jump at a deal with the U.S. if given the chance. Now, Mercosur seems to be headed into the Quebec summit divided--and with no clear bargaining position.

If Mercosur is adrift, it's mainly Brazil's fault. "Brazilians have failed to develop a regional mentality," says Riordan Roett, director of Western Hemisphere Studies at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University in Washington. "The complaint you hear from people in Montevideo and Buenos Aires is that when Brazilians say Mercosur, what they really mean is Brazil."

It's easy to see why. It is Brazil, after all, that has claimed the lion's share of Mercosur's spoils. Trade between the bloc's four members has surged from $4 billion in 1990 to an estimated $18.5 billion last year. But Brazil alone accounts for more than three-quarters of all intra-bloc commerce. The country has also scored big in terms of foreign direct investment. Lured in part by the prospect of a unified South American market, foreign companies poured $30 billion into Brazil last year, up from $780 million in 1990. Yet Brazil's gains have sometimes come at the expense of its Mercosur partners. For instance, a number of carmakers have shifted production from Argentina to Brazil to take advantage of the latter's lower operating costs.STUCK. Meanwhile, Mercosur seems to be stuck in first gear. The idea of creating a common currency a la the euro remains a distant dream. The same goes for a proposed union with the five-nation Andean Community. And Mercosur's institutions remain weak. Policymaking is mainly in the hands of member countries' foreign ministries and all decisions must be ratified by their respective legislatures. Brazil's partners want to create an independent Mercosur decision-making body, partly in the hope that this would increase their bargaining power within the bloc, but Brasilia is in no hurry to comply. "Brazil's problem in Mercosur is that it doesn't understand that to deepen the union, it must be prepared to share sovereignty," says Joao Paulo Veiga of Cedec, a Sao Paulo economic think tank.

Brazil's habit of putting its own interests ahead of those of Mercosur has badly strained relations between the bloc's members. At a Mercosur summit in December, it stymied efforts led by Argentina to lower the average tariff on imports coming from outside the trading bloc by three percentage points, to 11%. Brasilia's intransigence on this point was one reason Chile turned its attentions to the U.S. Chilean import tariffs average only 8% and the country has always been reluctant to bring them into line with those of Mercosur. Besides, Chile has already inked free-trade accords with Mexico and Canada, so a deal with the U.S. would give it automatic entry into NAFTA--something the country has long desired.

The risk now is that Argentina may be tempted to follow Chile's lead. That would deal a serious blow to Brazil's goal of presenting a united South American front at the FTAA negotiations. At stake are several issues near and dear to Brazil's heart, such as lowering U.S. barriers to its highly competitive agricultural products, and blocking the inclusion of environmental and labor clauses in an agreement, a move South American nations see as veiled protectionism.

But instead of working double-time to heal Mercosur's internal divisions and develop a common negotiating position, the Brazilians look to be stalling. It appears that Brasilia wants the incoming Bush Administration to tip its hand before deciding how to play its own. "Brazil is playing a waiting game--and that's risky," says Veiga. If that's the strategy, Brazil--and Mercosur--could end up squandering a precious opportunity to place South American concerns at the center of hemispheric trade talks.By Jonathan Wheatley; Wheatley Covers Brazilian Politics and Economics from Sao Paulo.